This practice note discusses market trends on how public companies' political contributions, or "political spending," is perceived to be intertwined with environmental, social, and governance (ESG) issues, and provides illustrative disclosures regarding political contributions. This practice note concludes with recommendations on how to prepare and enhance such disclosures.

Political Contributions as ESG Issue

Over the years, there have been calls from legal academics, investors, and activist shareholders for the Securities and Exchange Commission (SEC) to adopt rules requiring public companies to disclose the use of corporate resources for political activities. The objective of these efforts is to empower investors with relevant information to (1) adequately assess "congruency between political contributions and company values," (2) understand the potential risks of these political contributions before they materialize, and (3) ultimately hold corporate managers accountable for these risks.

The importance of these issues is highlighted by recent examples in which activist shareholders have asserted that a company's political expenditures were inconsistent with its publicly disclosed ESG policies and values. For example, on January 25, 2021, shortly after a group of protesters had stormed the U.S. Capitol, 24 officials from public pension funds wrote a letter to Larry Fink, the chief executive officer of BlackRock, the largest money manager in the United States, demanding that the company withhold all corporate political contributions to U.S. Congressmen who opposed the certification of the election of President Biden and publicly disclose all of its direct and indirect corporate political spending. The letter further noted that, despite the fact that BlackRock had established strict disclosure requirements for its portfolio companies on many ESG topics, including corporate political spending, "BlackRock's disclosure of its own activities on its website falls short of the expectations BlackRock set for portfolio companies," and further claimed that BlackRock had failed "to demonstrate leadership in its own practices.

Similarly, on April 8, 2021, a group of activist investors in JPMorgan Chase & Co. submitted a shareholder proposal that the company produce "an annual report analyzing the congruency of political and electioneering expenditures during the preceding year against publicly stated company values and policies." The investor group noted in the proposal that the company had donated hundreds of thousands of dollars in the preceding year to politicians with records of opposition to proactive climate policy, LGBTQ rights, and reproductive rights, which seemingly contradicted the company's public statements in support of those same issues.

The recent increase in shareholder activism relating to corporate disclosure of political contributions has become a focus for the SEC. In her March 2021 speech, thenacting SEC Chair Allison Herren Lee stated that "political spending disclosure is inextricably linked to ESG issues" and "key to any discussion of sustainability." During his nomination hearing on March 2, 2021, before the U.S. Senate Committee on Banking, Housing, and Urban Affairs, SEC Chairman Gary Gensler, when asked by U.S. Senator Bob Menendez whether corporate political spending is material information that should be disclosed to investors, stated that he would be "grounded . . . in the materiality standard that drives all those decisions on disclosure." Chairman Gensler also noted that nearly 80 shareholder proposals during the previous proxy season had addressed lobbying spending and political contributions and stated that disclosure of political contributions was an issue that the SEC "should consider in light of the strong investor interest."

Despite the foregoing, the SEC has yet to propose, let alone adopt, any rule on this topic because it is prevented by the Consolidated Appropriations Act of 2021 from using its allocated funds to "finalize, issue, or implement any rule, regulation, or order regarding the disclosure of political contributions, contributions to tax exempt organizations, or dues paid to trade associations" (H.R. 133, Pub. Law No. 116-260, Sec. 631). Consequently, there is limited guidance as to how public companies should disclose their political contributions.

For further information on public company disclosure in general, see Public Company Periodic Reporting and Disclosure Obligations and Periodic and Current Reporting Resource Kit.

Disclosure on Political Contributions Included in MD&A

Item 303(a) (17 C.F.R. § 229.303) of Regulation S-K, management's discussion and analysis of financial condition and results of operations (MD&A), requires a discussion of a company's financial condition and changes in financial condition and results of operations, as well as any known trends or factors that management believes to be important to the company's liquidity, capital resources, and results of operations. This includes known trends, commitments, events, or uncertainties that will likely have a material impact on the company's business. MD&A should not include merely generic or boilerplate disclosures but should reflect how particular facts and circumstances affect the company and its business.

For more information about MD&A generally, see Management's Discussion and Analysis of Financial Condition and Results of Operations and Management's Discussion and Analysis Section Drafting Checklist.

A number of public companies have disclosed, in the MD&A section of their quarterly and annual reports, their expenses from lobbying activities and a general description of those activities. For example, several companies discuss lobbying expenditures generally in support of state-level legislation and ballot measures but did not identify the causes or issues to which these lobbying activities related or the positions the companies took regarding those causes or issues. These disclosures also generally did not identify any political candidates as recipients of corporate political contributions.

The following are some examples of political contribution disclosures included in the MD&A section of recent periodic reports.

Executive Summary

  • "FirstEnergy is making significant changes in its approach to political and legislative engagement and advocacy, through stopping all contributions to 501(c)(4) organizations, the pause of other political disbursements, including from the FirstEnergy Political Action Committee, limiting participation in the political process, suspending or terminating various political consulting relationships, and adding additional oversight and significantly more robust disclosure around political spending to provide increased transparency." FirstEnergy Corp., Form 10-Q filed October 28, 2021 (SIC Code 4911—Electric Services)

Results of Operations

  • "Other expenses, net consists of . . . (ii) non-recurring expenses relating to lobbying efforts and legal expenses in Pennsylvania and lobbying efforts in Missouri . . . ." Accel Entertainment, Inc., Form 10-Q filed November 3, 2021 (SIC Code 7900—Services—Amusement & Recreation Services)
  • "There was an increase in outside and professional services of $0.5 million due to higher legal and lobbying expenses as well as additional cost for consultants to implement new software solutions." WM Technology, Inc., Form 10-Q filed August 13, 2021 (SIC Code 7372—Prepackaged Software)
  • "During the second quarter of 2020, we recognized $0.5 million [in] Colorado legislation lobbying expenses . . . . These expenses are included in Other operating items, net in the Consolidated Statement of Operations." Monarch Casino & Resort Inc., Form 10-Q filed August 6, 2021 (SIC Code 7011—Hotels and Motels)
  • "General and administrative expenses increased $5.9 million, or 8.2%, to $77.9 million for the year ended December 31, 2020 compared to $71.9 million for the year ended December 31, 2019. The increase was primarily attributable to political contributions made for statewide ballot measures." Hudson Pacific Properties, Inc., Form 10-K filed February 22, 2021 (SIC Code 6500—Real Estate)

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